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The Impact of Colombia's Pension and Health Insurance Systems on Informality

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  • Calderón-Mejía, Valentina

    ()
    (University of Chicago)

  • Marinescu, Ioana E.

    ()
    (Harris School, University of Chicago)

Abstract

Social protection systems in developing countries are typically composed of a bundle of benefits, the major ones being health insurance and pensions. Benefit bundling may increase informality and decrease welfare. Indeed, if some of the benefits are valued at substantially less than their cost, workers may choose to forego all benefits, even though some other benefits are valued at or above their cost. We examine the impact of benefit bundling using a series of Colombian reforms. The key reform is the unification of the payment systems for health and pension, which made it more difficult to contribute differently to the one plan versus the other. Using the progressive roll-out of the unified payment system by firm size, we show that benefit bundling increases both full formality and full informality by about 1 percentage point. The increase in full formality is concentrated among salaried workers in small to medium firms, while the increase in full informality is concentrated among independent workers.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6439.

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Length: 43 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6439

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Keywords: informal sector; pensions; health insurance; social protection; Colombia;

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References

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  1. Carmen Pages & Lucia Madrigal, 2008. "Is Informality a Good Measure of Job Quality? Evidence from Job Satisfaction Data," Research Department Publications 4603, Inter-American Development Bank, Research Department.
  2. Kugler, Adriana D. & Kugler, Maurice, 2003. "The Labour Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia," CEPR Discussion Papers 4046, C.E.P.R. Discussion Papers.
  3. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, October.
  4. Camacho, Adriana & Conover, Emily & Hoyos, Alejandro, 2013. "Effects of Colombia's social protection system on workers'choice between formal and informal employment," Policy Research Working Paper Series 6564, The World Bank.
  5. Sebastian Galiani & Federico Weinschelbaum, 2007. "Modeling Informality Formally: Households and Firms," CEDLAS, Working Papers 0047, CEDLAS, Universidad Nacional de La Plata.
  6. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
  7. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
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Citations

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Cited by:
  1. Adriana Camacho & Emily Conover & Alejandro Hoyos, 2009. "Effects of Colombia's Social Protection System on Workers' Choice between Formal and Informal Employment," DOCUMENTOS CEDE 006003, UNIVERSIDAD DE LOS ANDES-CEDE.
  2. Azuara, Oliver & Marinescu, Ioana, 2013. "Informality and the expansion of social protection programs: Evidence from Mexico," Journal of Health Economics, Elsevier, vol. 32(5), pages 938-950.
  3. Peña, Ximena, 2013. "The formal and informal sectors in Colombia : country case study on labour market segmentation," ILO Working Papers 482088, International Labour Organization.

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